Will increased R&D spending pay off for Synairgen’s share price?

DCarpet development and discovery company Synairgen (SNG) is expected to see a substantial decline in profits for the year 2021, due to the shutdown of its Covid-19 treatment.

According to the consensus estimates of analysts interviewed by MarketScreener, the company is expected to record an operating loss of £46.4 million, compared to a loss of £17.5 million the previous year, when the annual results are published on May 25. Net profit is also expected to fall 165% year-on-year to a loss of £46.9m, from a loss of £13.9m in 2020, due to higher R&D and manufacturing costs.

The group, which split from the University of Southampton in 2003, has had a difficult year so far, after trials for its respiratory drug SNG001 were halted. The news shook investor confidence, causing Synairgen’s share price to plummet 84.1% on February 21.

Covid-19 drug: a catalyst for Synairgen stock

Synairgen had seen increased investor interest after announcing it was developing an inhaled drug, SNG001, to treat lower respiratory illnesses caused by viruses such as SARS, MERS and Covid-19.

As biotech companies raced to develop treatments and vaccines for Covid-19, Synairgen’s share price soared 1,138.5% from March 11 to October 11, 2020, on promising results from its phase two trials, which showed the drug reduced the chances of people developing severe Covid-19 by around 80%.

However, Synairgen stock has been more volatile since then as confidence in whether SNG001 was an effective solution began to waver.

However, the biggest blow to Synairgen’s stock came in February 2022, when the group revealed disappointing results from its phase three trials. The study found that patients given SNG001 were no more likely to be discharged from hospital than patients given a placebo.

Its share price slumped from 171p at the close on February 17 to just 11.12p at the opening of trading the following day after news broke that it was halting its SNG001 trials in the US. The company said the study will need to be modified due to a “significant change in the nature of the pandemic.” Nevertheless, the company had noted from the trial an encouraging reduction in the relative risk of progression to serious disease or death within 35 days.

Increase in R&D spending in H1

In its half-year results, announced in September 2021, Synairgen recorded a pre-tax loss of £38.9 million, compared to a loss of £5.1 million in the same period in 2020. R&D expenditure increased amounted to £36.9m, a huge increase on the £4.5m spent in 2020, as it advanced its phase three trial and “stepped up manufacturing”.

As the stock fell 7.9% on the day of the announcement, CEO Richard Marsden remained confident about the company’s prospects and the importance of its drug SNG001.

“The need for an effective broad-spectrum antiviral to treat patients hospitalized with Covid-19 remains urgent,” he said, explaining that a drug to treat acute symptoms is still needed despite the development of effective vaccines. “This, together with the potential for declining immunity and the emergence of new variants of SARS-CoV-2, highlights the urgent need for additional effective antiviral therapies,” he added.

What future for Synairgen stock?

According to MarketScreeneronly one analyst has a Buy rating on Synairgen and a target price of 220p, representing an 87% upside from the May 19 closing price.

It’s understandable that brokers aren’t lining up to give their predictions on a stock so dependent on trial results and yet generating so much in terms of revenue. Synairgen’s share price has already shown its vulnerability to headwinds in the testing process. Even if the drug proves effective, further delays could be created as it seeks regulatory approval.

Looking ahead, there could be good news for investors if trials can resume. On May 16, Synairgen released full results from its phase three trial, which showed stronger treatment effects in high-risk patient subgroups such as those with comorbidities. The company’s chief scientific officer, Phillip Monk, argued that there is a “strong clinical rationale” for continuing the research.

Shares of Synairgen rose 27.8% on the day of the announcement. Although it has since fallen, this momentum suggests that positive annual results could help the stock reverse some of its losses.

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